FINANCING CLUSTERS OF INNOVATION: the geography of venture capital investment, US

1
FINANCING CLUSTERS OF INNOVATIONthe geography
of venture capital investment, US UK

• Terry L. Babcock-Lumish
• University of Oxford
• Islay Consulting LLC
• New Finance of Americas Cities Research
  Symposium
• December 10-11, 2007
• Cambridge, Massachusetts

2
Introduction

• Professional background
• academic and applied
• Research interests and efforts
• seek to integrate local with global
• ?contribution to emerging synthesis of finance
  NEG
• Clark Freeman 2007

3
Overview of presentation

• Global and local
• increasing global integration
• continuing importance of regional dynamics
• importance of fundamental drivers in unceasing
  search for returns
• Patterns of Anglo-American VC investment
• GIS mapping
• Investing in the familiar
• risk mitigation relational economic geography
• Empirical redux
• Lessons learned 7 Cs
• capital, capability, creativity, culture,
  cluster, connection, collaboration

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Why venture capital?

• Investors with varied commitments, incentives,
  expertise
• private v. public
• tranches size stage
• time horizon
• Risks
• technical, commercial, financial
• high probability of failure
• understood, shared, managed

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Structure of venture capital

• Large institutional investors
• reliant on intermediaries for local knowledge
• Reputation
• as signal
• representing experience and riskiness
• as screen
• representing nature and value of opportunities
• An implicit or shadow market
• relationships, networks, partnerships

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Trust becomes essential

• Intermediaries unable to specify risk parameters
• Payoffs uncertain, compared to alternatives
• in time
• in magnitude
• Commitment a critical element within partnership
• Repeat game interaction
• players known
• past outcomes known

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Trust communities

• A response to the problem of risk management
• reliant upon highly interconnected networks
• based on local institutions
• meeting, information exchange, negotiation
• social and cultural identification important
• prospect of community approbation
• betrayal punished and broadcast

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The role of geography

• Sets
• economic context, especially re nature of
  innovation
• boundaries of financial and social relationships
• social parameters and norms
• Private equity
• as opposed to publicly traded and regulated
  markets
• without formal regulation within or between
  institutions and investors

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US VC investment, 2002
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UK VC investment, 2002
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Investing in the familiar

• Highly mobile capital, and yet
• Benefits of
• collocation
• relational transaction
• spatial agglomeration
• local investment
• ? IMPLICATIONS FOR FINANCING OF CLUSTERS OF
  INNOVATION

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Review of empirical findings

• Focus on
• ICT biotech
• London Boston
• 2002-04, i.e. emerging from TMT bubble
• Methodology qualitative and quantitative
• Work sought to address gap in VC research, i.e.
  largely undersocialized
• Yet relationships essential to decision-making
  and risk mitigation/management
• Function of trustworthiness - or identity and
  shared experience as its proxy

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Compare Boston and London

• Risk communities can be open or closed

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Innovation center networks

• Differences in degree of openness
• Importance of social identity
• variously defined

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Q methodology
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7 Cs

• Capital
• Capability
• Creativity
• Culture
• Cluster
• Connection
• Collaboration
• An 8th C of competition is pervasive throughout
  each of the 7

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Implications of our 7 Cs

• Guide dialogue and ultimately action
• Contribution to literature and practice
• Decision-makers often address one or a few
  variables but infrequently all and never
  simultaneously, coherently, and comprehensively
• Incentive alignment essential, local to global,
  for competitiveness and welfare alike

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Further reading

• Babcock-Lumish, T. L. (2005) Venture capital
  decision-making and the cultures of risk an
  application of Q methodology to US and UK
  innovation clusters. Competition and Change, 9,
  329-356.
• Babcock-Lumish, T. L. (2007) Trust the
  relational dynamics of innovation investment
  communities. Working Paper, 1-33.
• Clark, G. L. Freeman, R. B. (2007) Global
  Finance, the New Economic Geography and Community
  Welfare. New Finance of America's Cities Research
  Symposium. Cambridge.
• Babcock-Lumish, T. L. Clark, G. L. (forthcoming
  2008) Pricing the economic landscape global
  financial markets and the communities and
  institutions of risk management. IN Wescoat, J.
  L. Johnston, D. M. (Eds.) Places of Power
  Political Economies of Landscape Change Places
  of Integrative Power. Dordrecht, Springer.
• Questions?